With Ally assets, RBC becomes top player in auto financing

Royal Bank of Canada has emerged from one of the most hotly contested auctions of domestic banking assets in years to buy the Canadian operations of Ally Financial Inc., which will make it the country's biggest player in auto financing.

As many as 15 bidders lined up to buy the Ally assets, with the bidding extending into extra rounds to cull the herd of interested buyers. In the end, RBC won the auction with a net investment of $1.4-billion.

The deal is worth $4.1-billion (U.S.) to Ally's parent bank, which has been jettisoning assets to help pay back funds it received from the U.S. government during the credit crisis. In addition to RBC's $1.4-billion (Canadian) investment, Ally will take a hefty dividend from the business before the transaction finally closes. The size of dividend will determine the final value of the asset, which will be between $3.1-billion and $3.8-billion, the bank said.

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The deal comes after heated bidding that extended over the weekend. Though 15 bidders, ranging from banks to private equity players and auto lenders looked at the deal, RBC and its rival Toronto-Dominion Bank were said to be among the most aggressive, with both looking to expand their presence in the auto-lending space. After TD expressed strong interest last week, RBC emerged victorious late Monday.

"It's a big win for us," David McKay, RBC's head of personal and commercial banking said in an interview Tuesday after the deal was announced. "It was a hotly contested deal."

While Ally's business involves no-fee business and consumer lending, along with deposits, the bulk of its business is made up of auto lending. Ally was once the financing arm of General Motors, but was spun out during the financial crisis when the auto maker ran into financial trouble. It was partly owned by the U.S. government in exchange for bailout funds.

Despite those troubles, the business has been profitable in recent years, making it an attractive investment for banks looking to bulk up their loan portfolios. With mortgage lending slowing in Canada after the federal government tightened lending rules to cool an overheating market, banks are seeking other ways to find loan growth.

Auto lending, which is bolstered by strong car sales data over the past year, is one area that has become particularly enticing to the banks. Toronto-Dominion Bank purchased the lending operations of Chrysler Financial Corp. in late 2010 for $6.3-billion, looking to take advantage of an upswing in auto loans as consumers who put off buying new cars in the recession now come back into the market.

Mr. McKay said the Ally deal will make RBC the largest auto lender in Canada. Ally lends to dealerships to stock their lots with vehicles, in addition to financing consumers when they decide to buy a car.

"Even if mortgages were growing well, we'd still look at this business, because it's a quality franchise," Mr. McKay said. "Having said that, it will be quite helpful to have this growth asset as the mortgage market continues to slow."

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In particular, RBC is interested in picking up the relationships with customers who walk into dealerships that offer Ally financing by issuing them RBC loans. "It's a great way to meet new customers in someone else's place of business," Mr. McKay said.

This is the second major purchase of Canadian banking assets after Bank of Nova Scotia bought ING Bank of Canada for $3.1-billion. That was the largest deal that Scotiabank has done in its 180-year history.

RBC was believed to have looked at bidding on the ING Canada assets as well. However, the bank said Tuesday, the Ally assets were its most coveted target. "Of the deals that we have looked at in Canada this was the one that we really wanted," RBC chief executive officer Gord Nixon said. "It's a business we like, it's a business that we have not been a leader in and this clearly positions us as a leader. We're very excited about it."

The Ally assets are expected to produce about $120-million in net income in the first year, after the deal closes in early 2013.

"We view the transaction positively as it increases scale and builds out Royal's very profitable domestic franchise," Barclays Capital analyst John Aiken said in a research note, pointing out that RBC will not need to raise equity to finance the acquisition.